As per Clause 13 of Part ll in Schedule A of (PFRDA (Preparation of Financial Statements and Auditor's Report of Schemes under National Pension System) Guildelines-2012',
An investment is regarded as non-performing, if interest/principal or both amounts have not been received or have remained outstanding for 90 days* from the day such income. Installment has fallen due. Provision shall be made by charge to the Revenue Account, in respect of:
a) Non performing Debt Securities as per the Authority Guidelines to be issued from time to time
(* May be read as one quarter)
Accordingly , Authority is prescribing the guidance not on identification, income recognition and provisioning of NPA in respect of debt securities.
1. Identification of Non-Performing Asset (NPA):
A debt security ('asset') shall be classified as Non-Performing Asset' (NPA) if the interest and/or installment of principal have not been received or remained outstanding for from the day such income and/or installment principal was due.
Example: If interest and/or installment of principal falls due and remains unpaid on 05-Mar-2013, then it will be classified as NPA after one quarter i.e. on 05-June-2013.
2. Treatment of income accrued on NPA and further accruals
2.1 After the expiry of the 1st quarter, from the date the interest has fallen due, there will be no further interest accrual on the asset i.e., from the beginning of the 2nd quarter from the date the interest has fallen due, interest should not be accrued on the asset.
2.2 (a) On classification of the asset as NPA, provision for all interest, accrued on that asset and recognized in the books of accounts of the scheme till date, should be made.
(b) Illustrative set of entries, which can be passed, can be as follows:
2.3 (a) However, for monitoring purposes, the PFM shall continue to calculate the interest accrued and due on the NPA (security wise) separately through the system, as a mirror account but should not be accounted for in the books of account of scheme.
(b) Following entry may be passed on every subsequent coupon due date:
Interest Due on NPA account)Dr.) (Nature of account is balance sheet item (Assets))
Provision for Interest overdue (Cr.) (nature of account is Balance sheet item(Liability))
(In the financial statements of schemes, prepared at the end of Financial year, the above entry will have to be nullified by reversing the said entry and need not be disclosed in the Balance sheet as this entry is only for monitoring purposes. The above entry is again required to be passed at the beginning of the next financial Year.)
2.4 Interest on NPA is recognized and booked as income only when it is actually received (i.e. on cash basis)
3. Provisioning for NPAs:
On classification of the asset as NPA, provision must be made on the book value in the following manner or at a higher percentage at the discretion of the Pension Fund with the approval of their investment Committee. However, Pension Fund will not have the discretion to extend the period of provisioning. The provisioning against the book value should be made at the following rates irrespective of whether the principal is due for repayment or not.
Period past due from due date of interest/installment of principal
Period past due from the date of classification of assets as NPA
% Provision on Book Value
Following entry can be passed in the Books of Account:
Profit and Loss a/c (Dr.)
Provision for Non-Performing Assets (Cr.)
4. Classification of Deep Discount Bonds as NPAs:
Investments in Deep Discount Bonds can be classifie as NPAs, if any two of the following conditions are satisfied:
i. If the rating of the Bond comes down below investment Grade,
ii. If the issuer is defaulting in their commitments in respect of other assets.
iii. Full Net worth erosion of issuer.
Provision should be made as per the norms set at clause-3 above as soon as the asset is classified as NPA.
5. Writing – back of provisioning and further accruals on reclassification of NPA as performing
5.1 Reclassification of Assets: The non-performing asset shall be re-reclassified as Performing asset, if all the arrears of interest and installment of principal are cleared and
The debt is regularly serviced for consecutive two quarters , or
Subsequent coupon is paid on due date, whichever is later.
5.2 Written-back of provisioning of interest: Upon reclassification of asset as performing asset
i. In case an issued has fully cleared all the arrears of interest, the interest provisions can be written back in full
5.3 Written-back of provisioning of Principal: The provision made for the principal can be written back in the following manner:
i. 100% of the asset provided for in the books will be written back at the end of the 2nd calendar quarter, where the provision of principal was made due to the interest defaults only.
ii. 50% of the asset provided for in the books wil be written back at the end of the 2nd calendar quarter and 25% after every subsequent quarter, where both principal and interest were in default earlier.
5.4 Accounting for accrual of interest:
Further accrual of interest on the performing assets shall be made after it has been classified as performing asset. Till such time, interest on the asset should be recognized on cash basis only. The interest not credited on accrual basis would be credited only at the time of actual receipt of interest.
6. Re-schedulement of an asset:
In case any issuer of debt security defaults in the payment of interest and installment of principal, if any, and the Pension Fund has accepted re-schedulement of NPA, it may be re-classified as performing asset if the next two coupons/installments of principal, if applicable is regularly serviced as re-scheduled. Clause 6 will be applicable for written-back of provisioning and further accruals on its reclassification as performing asset.
7. Disclosure of NPA in the monthly portfolio details:
7.1 The Pension Fund shall make security-wise monthly disclosures of NPAs in the monthly portfolio details.
7.2 The total amount of provisions made against the NPAs shall be disclosed in addition to the total Book Value of NPAs. Further, the proportion of NPA with respect to the assets under management (AUM) of the respective scheme may also be disclosed. In the list of investments an asterisk mark shall be given against such investments which are recognized as NPAs.
7.3 Where the date of redemption of an investment has lapsed, the amount not redeemed shall be shown as “sundry Debtors” and not as investment provided, that where an investment is redeemable by installments, it will be shown as an investment until all installments have become overdue.
8. written off NPA on identification as “loss assets”
8.1 A “loss asset” is one which is deemed as un-recoverable or its value has been diminished and has been identified by the Pension Fund or scheme auditors as such. On classifying the NPA as loss asset, the asset along with its provision should be written off by the Pension Fund after obtaining approval from its Board of Directors or its Investment Committee (subject to report to the Board of Directors). The following entry may be passed.
Provision for Non-Performing Assets (Dr.)
Sundry Debtors/Investment (cr.)
8.2 The “provision for Interest Overdue”, made as per clause-2 may be written off against interest Due on NPA account and following entry may be passed:
Provision for Interest overdue (Dr.) (Balance sheet: Liability side)
Interest Due on NPA account (Cr.) ( Balance Sheet: Assets side)